The year of 2018 was an interesting one for South Africans – from a newly instated president, interesting IT revelations from SARS, and a couple of finance ministers. The V.A.T. increase of 1% in April 2018 came after 25 years of V.A.T. being set at 14%. One of the areas it affected was the buying and selling of properties.
An issue was how the increase in V.A.T. would affect property transactions that were currently being concluded.
What does a V.A.T. increase due to property transactions?
V.A.T. is payable on many property transactions, and it is usually payable by the seller of the property. What conveyancers have to wrestle with is the applicability of the new V.A.T. rate to current real estate transactions, especially when a residential property is involved.
The general rule for the amount of V.A.T. paid for a property transaction is determined by the date of registration of the transfer of the property at the Deeds Office, or the date payment was made to the seller – whichever comes first.
The issue this raised was where a sales agreement was entered into well before 1st April 2018, with both parties signing the agreement, and construction proceeding, but the registration of the transfer of the property at the Deeds Office and payment being made after 1st April.
Fortunately, section 67A(4) of the V.A.T. Act, provides that, subject to certain conditions, the V.A.T rate that is effective on the date that the written sales agreement is entered into applies.
In terms of this ruling, as long as a sale agreement was signed by both parties, contained a clear stipulation of the agreed price, and was concluded before 1st April 2018, the V.A.T. payable could be calculated on the outgoing rate, despite the fact that transfer took place after 1st April.
What does a V.A.T. increase mean to sellers and estate agents?
A sale contract could state that commission plus V.A.T. is payable. The seller receives a lower net amount because the estate agent receives more. If the sales agreement states a fixed commission including VAT, the seller receives the same amount regardless of the VAT increase, but the estate agent receives less.
In practice, if a house cost R2 500 000 and the commission was R100 000, the V.A.T. amount of 14% before 1st April would be R14 000 and the seller would receive R2 486 000. After 1st April, the V.A.T. on a commission of R100 000 would be R15 000 and the seller would receive R1 000 less.
V.A.T. and Transfer Duty
You need to find out whether the purchase price of a residential property excludes or includes V.A.T. to avoid any financial ramifications later on. If the seller is registered for V.A.T., the purchase prices includes V.A.T., which is payable on transfer. If the seller is not registered for V.A.T., transfer duty has to be paid by the buyer.
You don’t have to pay both V.A.T. and transfer duty on a property transaction but the difference can be significant. For example, on a property you buy for R2 000 000, the transfer duty could be far less than if you end up paying a purchase price inclusive of V.A.T. which could increase the price quite substantially.
V.A.T. can make a difference when it comes to how much you get as a seller of a property. A good estate agent will be able to give you the right advice when it comes to looking at the numbers and drawing up a sales agreement that doesn’t put you at a disadvantage in any way.